Markets put ECB to test

Has Wim Duisenberg changed his policy?

As the euro hits fresh lows against the dollar, European Central Bank-watchers say the institution has made a policy u-turn which may explain the euro's slump. The BBC's Rodney Smith reports.

Something happened at the European Central Bank last week, spotted by people who spend a lot of timing watching the ECB - what the US calls "Fedwatchers" on its own turf.

What ECB-watchers noticed was that the Bank, which has worked very hard to persuade the markets that it does not have an exchange rate policy, and sees no reason to interfere with the euro, has changed direction.

Thanks to Paribas' incisive ECB-watcher Ken Wattret, we see that the last section of an ECB statement focuses clearly on the exchange rate.

It discussed possible implications for price stability in the euro area and judged that they did not reflect the strong economic fundamentals of the euro area.

Heard all that before. But it does look as though the foreign currency markets have laid a trap, and the ECB has fallen right into it.

That would certainly go some way to explaining the euro's fresh weakness. Determination by the markets to test the ECB to its limits.

Intervention unlikely

Will the Bank intervene? Can it?

It would certainly be the evidence that the currency markets needed that any pretence at not supporting the euro was hogwash.

Unlikely then, especially given ECB President Wim Duisenberg's repeated suggestions that it is not an option.

To be effective it would probably need G-7 support, and that looks unlikely in the short term.

So we will know more about what to look for after the Bank's next news conference.

Listen and look, budding ECB-watchers, for how euro-weakness is discussed. And expect a rough ride for the euro over the summer.